Sun, 25 May 2008

Many people who believe that we should be thinking less of ourselves,
and more about the future, cite the Iroquois maxim of thinking "Seven
Generations" ahead. Why seven? Why not eight? Economists who have
studied this issue call that number the result of the discount rate.

People discount the future. Not entirely, and not all at once.
Life is uncertain, and with the passage of every bit of time, your plans
have a chance of being disrupted. After enough bits of time, the
chances of being disrupted add up to a probability of one. Beyond
this time, you cannot plan, and you SHOULD NOT plan.

How do you determine the discount rate? As it turns out, the discount
rate is proportional to the (natural) interest rate. That rate is what
people charge to lend money. Getting paid back is a plan, and those plans
could be disrupted because of unforseeable future events, so people insist
on being paid back more than they have loaned.

People's discount rate is roughly equivalent to the inverse of the level of
civilization in which they find themselves. Every sane person wants
the discount to be as low as possible, and the level of civilization
as high as possible. Political action increases the
discount, because it makes people's plans less likely to come to
fruition. That's why, when economists say that they want a small
government, what they really are saying is that they want a prosperous
society.